Lifecell Corp - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Lifecell Corp (MM)	NASDAQ:LIFC	NASDAQ	Common Stock

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 01-19890

LifeCell Corporation

(Exact name of registrant as specified in its charter)

Delaware	76-0172936
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

One Millennium Way, Branchburg, New Jersey 08876

(Address of principal executive office) (Zip code)

(908) 947-1100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of April 21, 2008, there were outstanding 34,227,000 shares of common stock, par value $.001, of the registrant.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

LIFECELL CORPORATION

BALANCE SHEETS

( dollars in thousands )

(unaudited)

	March 31		December 31,
	2008		2007
ASSETS
Current assets
Cash and cash equivalents	$	37,845	$	26,819
Short-term investments		48,964		64,217
Receivables, less allowance of $280 in 2008 and $278 in 2007		28,076		25,734
Inventories, net		50,542		44,267
Prepayments and other		5,214		10,706
Deferred tax assets		2,307		2,384
Total current assets		172,948		174,127

Investments in marketable securities		6,548		6,886
Fixed assets, net		29,251		27,706
Deferred tax assets		3,357		4,950
Other assets, net		3,227		3,329
Total assets	$	215,331	$	216,998

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	22,929	$	20,748
Accrued liabilities		11,223		25,048
Total current liabilities		34,152		45,796

Commitments and contingencies

Stockholders’ equity

Undesignated preferred stock, $.001 par value, 1,817,795 shares authorized; none issued and outstanding		--		--
Common stock, $.001 par value, 48,000,000 shares authorized; 34,200,000 and 34,180,000 shares issued and outstanding in 2008 and 2007		34		34
Additional paid-in capital		153,530		150,379
Accumulated other comprehensive income		158		95
Retained earnings		27,457		20,694
Total stockholders’ equity		181,179		171,202
Total liabilities and stockholders’ equity	$	215,331	$	216,998

The accompanying notes are an integral part of these financial statements.

LIFECELL CORPORATION

STATEMENTS OF OPERATIONS

( dollars in thousands, except per share data )

(unaudited)

	Three months ended March 31,
	2008		2007
Revenues:
Product revenues	$	54,317	$	42,744
Research grant revenues		112		218
Total revenues		54,429		42,962

Costs and expenses:
Cost of products sold		17,065		12,416
Research and development		6,963		5,168
General and administrative		6,392		4,828
Selling and marketing		12,718		10,124
Total costs and expenses		43,138		32,536

Income from operations		11,291		10,426

Interest and other income, net		897		969

Income before income taxes		12,188		11,395

Income tax provision		5,425		4,968

Net income	$	6,763	$	6,427

Net income per common share:
Basic	$	0.20	$	0.19
Diluted	$	0.19	$	0.19

Shares used in computing net income per common share:
Basic		34,013,000		33,058,000
Diluted		34,914,000		34,142,000

The accompanying notes are an integral part of these financial statements

LIFECELL CORPORATION

STATEMENTS OF CASH FLOWS

( dollars in thousands )

(unaudited)

	Three months ended March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	6,763		$	6,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,494			910
Deferred taxes		4,705			2,063
Excess tax benefit from stock-based compensation		(3,067	)		(321	)
Stock-based compensation		3,161			2,329
Provision for bad debt		2			42
Inventory net realizable value provision		73			553
Gain on disposal of fixed assets		(2	)		-
Changes in operating assets and liabilities:
Receivables		(2,344	)		(298	)
Inventories		(6,081	)		(4,097	)
Prepayments and other		1,494			378
Accounts payable and accrued liabilities		(7,645	)		(1,601	)

Net cash (used) provided by operating activities		(1,447	)		6,385

Cash flows from investing activities:
Proceeds from maturities and sale of investments		15,710			11,769
Purchases of investments		-			(12,413	)
Proceeds from sale of equipment		5			-
Capital expenditures		(2,940	)		(1,561	)

Net cash provided (used) in investing activities		12,775			(2,205	)

Cash flows from financing activities:
Cash paid to employees in lieu of vested common stock		(4,817	)		-
Proceeds from exercise of common stock options		1,448			682
Excess tax benefit from stock-based compensation		3,067			321

Net cash (used) provided by financing activities		(302	)		1,003

Net increase in cash and cash equivalents		11,026			5,183
Cash and cash equivalents at beginning of period		26,819			10,000

Cash and cash equivalents at end of period	$	37,845		$	15,183

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	-		$	875

The accompanying notes are an integral part of these financial statements.

LIFECELL CORPORATION

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1.	Basis of Presentation

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. This financial information should be read in conjunction with the financial statements and notes thereto included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which in the opinion of management are necessary for a fair statement of financial position, results of operations and cash flows for the periods presented. The financial results for interim periods are not necessarily indicative of the results to be expected for the full year or future interim periods.

2.	Accounting Policies

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The partial adoption of SFAS No. 157 on January 1, 2008, for financial assets and liabilities did not have a material impact on the Company’s financial position, results of operations or cash flows. The Company's financial instruments consist of cash and cash equivalents, short-term and long-term investments in marketable securities, accounts receivable, accounts payable and certain current liabilities. Fair value for these investments are based on readily available market prices.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," which provides a fair value option election that permits entities to irrevocably elect to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value as the initial and subsequent measurement attribute, with changes in fair value recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption of SFAS No. 159 on January 1, 2008, for financial assets and liabilities did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company has not materially changed its significant accounting policies.

3.	Inventories, net

Inventories consist of the following:

		March 31,		December 31,
		2008		2007
	(dollars in thousands)
Unprocessed tissue and materials		$	25,388	$	24,213
Tissue products in-process			7,292		7,933
Tissue products available for distribution			17,862		12,121
Inventories, net		$	50,542	$	44,267

4.	Fixed Assets

Fixed assets consist of the following:

	March 31,			December 31,
	2008			2007
	(dollars in thousands)
Machinery and equipment	$	15,462		$	14,905
Leasehold improvements		26,031			23,973
Computer hardware, furniture and fixtures		5,310			5,275
Computer software		3,083			2,809
		49,886			46,962
Accumulated depreciation and amortization		(20,635	)		(19,256	)
Fixed assets, net	$	29,251		$	27,706

5.	Income Taxes

The tax provision for the three months ended March 31, 2008 and 2007 represents Federal and state income taxes. The Company's effective rate of 44.5% and 43.6%, respectively, differs from the U.S. Federal statutory rate due to the impact of stock-based compensation which cannot currently be recognized for tax purposes, and state income taxes, net of the federal benefit. The increase in the effective tax rate was primarily due to the expiration of the credit for increasing research activities. Qualified research expenditures after December 31, 2007 are no longer eligible for tax credits. In the three months ended March 31, 2008 and 2007, the Company realized $3.1 million and $361,000, respectively, of tax benefits related to the exercise of employee stock options and vesting of restricted stock. These tax benefits were recorded as a direct credit to stockholder’s equity, and therefore, had no impact on the Company’s tax provision.

6.	Share-Based Compensation

The LifeCell Corporation Equity Compensation Plan authorizes the issuance of various forms of stock-based awards, including incentive and non-statutory stock options, stock purchase rights, stock appreciation rights, and restricted and unrestricted stock awards. A total of 5,850,000 shares were authorized to be issued under the Plan through March 1, 2010. At March 31, 2008, there were 678,000 shares available for future awards under the Plan.

The Company recognizes share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, (‘SFAS 123R”) “Share-Based Payment”. Share-based compensation expense was $3.2 million and $2.3 million for the quarters ended March 31, 2008 and March 31, 2007, respectively. In addition, there was $875,000 and $317,000 of stock-based compensation cost capitalized in inventory at March 31, 2008 and March 31, 2007, respectively. As of March 31, 2008, $29.9 million of total unrecognized compensation costs related to non-vested stock options and restricted stock is expected to be recognized over a weighted average period of 2.1 years.

Stock Options

A summary of stock option activity for the three months ended March 31, 2008 is as follows:

	Number of shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2007	1,813,000	$	17.61
Granted	450,000	$	43.20
Exercised	(111,000)	$	13.08		$	3,104
Forfeited or canceled	(47,000)	$	29.28

Outstanding at March 31, 2008	2,105,000	$	23.05	7.8 years	$	39,941

Exercisable at March 31. 2008	804,000	$	11.83	6.6 years	$	24,265

Stock option awards issued by the Company generally vest over four years and have a ten year life. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model and records the compensation expense ratably over the service period.

The fair value of stock options granted during each of the periods was estimated using the following assumptions:

	Three Months Ended March 31,
	2008			2007
Volatility		49.3	%		56.1	%
Expected term (years)		5.36			5.69
Risk free interest rate		2.2% - 3.2	%		4.3% - 4.6	%
Expected dividend yield		0.0	%		0.0	%

The weighted average grant date fair value of stock options granted during the first quarter of 2008 was $20.74 per share.

In connection with the stock option exercises during the three months ended March 31, 2008, the Company received proceeds of $1.5 million.

Restricted Stock

The Company grants restricted stock to employees and directors that entitle the holders to receive shares of the Company’s common stock upon the fulfillment of certain service and/or performance conditions. The fair value of restricted stock is based on the market price of the Company’s stock on the date of grant and is recorded as compensation expense ratably over the service period, generally three to four years. For restricted stock awards that also have performance conditions, the compensation expense is based on the expected future performance.

A summary of restricted stock activity for the three months ended March 31, 2008 is as follows:

	Non-vested Number of shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2007		323,000		$	22.62
Granted		242,000		$	42.70
Vested		(45,000	)	$	21.53	$	1,972
Forfeited		(15,000	)	$	35.30
Balance at March 31, 2008		505,000		$	32.16

7.	Net Income per Common Share

The following table sets forth the computation of basic and diluted net income per common share:

	Three Months Ended March 31,
	2008		2007
	(dollars in thousands, except per share data)
Net income	$	6,763	$	6,427

Weighted average common shares outstanding		34,013,000		33,058,000
Denominator for basic net income per share		34,013,000		33,058,000

Effect of dilutive securities:
Common stock options		660,000		710,000
Restricted stock		241,000		374,000
Denominator for diluted net income per common share		34,914,000		34,142,000

Basic net income per common share	$	0.20	$	0.19

Diluted net income per common share	$	0.19	$	0.19

The calculation of net income per common share for the quarters ended March 31, 2008 and 2007 excludes potentially dilutive common stock of 652,000 in 2008 and 911,000 in 2007 because their inclusion would be antidilutive.

8.	Comprehensive Income

The components of comprehensive income, net of tax, were as follows:

	Three Months Ended March 31,
	2008		2007
	(dollars in thousands)
Net income	$	6,763	$	6,427
Other comprehensive gain:
Change in net unrealized holding gain on available for sale investments		63		2
Comprehensive income	$	6,826	$	6,429

9.	Commitments and Contingencies

Litigation

In September 2005, the Company recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), may not have followed the FDA’s requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. The Company promptly notified the FDA and all relevant hospitals and medical professionals. The FDA subsequently determined that patients who received tissue implants prepared from BTS donor tissue might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. The Company did not receive any donor tissue from BTS after September 2005.

The Company has been named, along with BTS and many other defendants, in lawsuits that relate to this matter. With the exception of the individual plaintiff cases discussed below, the suits purport to serve as class actions for persons receiving transplants who are not physically injured, but instead seek medical monitoring and/or damages for emotional distress. All of these cases are venued in New Jersey as part of a Multi-District Litigation (“MDL”). The Company has been successful in obtaining a voluntarily dismissal of every such class action, with the exception of one case that purports to only involve LifeCell products (“Watling”).

In addition, several suits, including a class action, have been filed in Federal Court in Rochester, New York and State Courts in New Jersey and Philadelphia Court of Common Pleas that seek compensatory damages from BTS and all processing defendants that received and used BTS-originated tissue, including LifeCell. Plaintiffs are the next-of-kin of the donors who did not authorize BTS to remove the tissue at issue. The Rochester cases which have been transferred to the MDL will be the subject of motions to dismiss. The other cases remain in the State Courts.

There has also been approximately 30 individual plaintiff cases filed in which those persons also seek compensatory damages for emotional distress and/or future medical monitoring. None of the individual plaintiffs claim any present physical injury. With the exception of twelve cases that were filed in the State Court in New Jersey and four cases in the State Court in Pennsylvania, all of the individual cases have been transferred to the MDL.

Finally, the Company has been named in three cases filed in the State Court of New Jersey, (“Turpyn”, “Wirkler” and “Guzman”) and one case in the MDL (“Robinson”), in which those plaintiffs allege to have contracted a disease from LifeCell’s product. Those cases are in the earliest stages of discovery and it is not presently confirmed that any plaintiff has been diagnosed with a disease nor is it known whether there is any casual relationship to the LifeCell product.

The Company intends to vigorously defend each case. The Company will pursue dismissal of all cases which do not involve its product being at issue. The Company believes it is not currently possible to estimate the likelihood of an unfavorable outcome and/or the impact, if any, that the ultimate resolution of these cases could have on the Company’s operations, financial position or cash flow. The Company maintains insurance coverage for events and in amounts that it deems appropriate. There can be no assurance that the level of insurance maintained will be sufficient to cover the claims or that all of the claims will be covered by the terms of any insurance.

On April 14, 2008, a purported stockholders class action complaint, captioned Richard Bauer v. LifeCell Corporation et al., was filed by a stockholder of LifeCell in the Chancery Division of the Superior Court of New Jersey in Somerset County, naming LifeCell, its directors and Kinetic Concepts, Inc., a Texas corporation (“KCI”) as defendants. The complaint alleges causes of action against the defendants for breach of fiduciary duties in connection with the proposed acquisition of LifeCell by KCI (see Note 10. Subsequent Event) and seeks relief including, among other things, (i) preliminary and permanent injunctions prohibiting consummation of the Offer and the Merger and (ii) payment of the plaintiff's costs and expenses, including attorneys' and experts' fees. The lawsuit is in its preliminary stage. LifeCell and KCI believe that the lawsuit is without merit and intend to defend vigorously against the lawsuit.

10.	Subsequent Event

On April 7, 2008, KCI and Leopard Acquisition Sub, Inc., a newly formed Delaware corporation and a wholly owned subsidiary of KCI (“Purchaser”), entered into an Agreement and Plan of Merger. On April 21, 2008, the Purchaser commenced a cash tender offer to purchase all of the issued and outstanding shares of common stock, par value $0.001 per share, of the Company at a price per share equal to $51.00. Following the consummation of the offer, the Purchaser is expected to merge with and into the Company, pursuant to which each outstanding share of Common Stock not purchased in the offer will be converted into the right to receive the offer price, except for those shares held by the Company, KCI or the Purchaser, and other than those shares with respect to which appraisal rights are properly exercised. After the merger, the Company will continue to exist as a wholly owned subsidiary of KCI.

The Offer will remain open for at least 20 business days, subject to extension. The obligation to accept for payment and pay for the shares of Common Stock tendered in the Offer is subject to customary conditions, including, among other things: (1) the tender of a majority of the total number of outstanding shares of Common Stock, calculated on a fully diluted basis, (2) the expiration or termination of any waiting period (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (3) the absence of injunctions prohibiting the Offer or the Merger, (4) the accuracy of the representations of the Company, subject to certain materiality exceptions, (5) compliance in all material respects with covenants of the Company, (6) absence of a material adverse effect on the Company since December 31, 2007 and (7) completion of Purchaser's and KCI's financing pursuant to the terms of an executed Commitment Letter among Purchaser, KCI and the lenders dated April 7, 2008.

The Merger Agreement contains customary representations, warranties and covenants of the parties. In particular, the Merger Agreement contains restrictions on the Company’s ability to solicit third party proposals or provide information to, or participate in discussions or negotiations with, third parties regarding competing proposals. However, the Merger Agreement contains customary exceptions that allow the Company to provide information to, and participate in discussions or negotiations with, third parties with respect to competing proposals in certain limited circumstances.

The Company may terminate the Merger Agreement under specified circumstances in order to enter into a definitive agreement implementing a Superior Proposal (as defined in the Merger Agreement). If the Company terminates the Merger Agreement to enter into a Superior Proposal or if the Merger Agreement is terminated by KCI under certain other specified circumstances, the Company is required to pay KCI a termination fee equal to $50 million.

If the Merger Agreement is terminated by the Company under certain specified circumstances (including KCI’s failure to consummate the Merger under certain specified circumstances, including the failure to complete the financing described above), KCI will be required to pay or cause to be paid to the Company a fee of $50 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our results of operations and financial condition should be read in conjunction with the Financial Statements and Notes included in Part I. “Financial Information”.

This report contains forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future.

Forward-looking statements may not be realized due to a variety of factors, including, without limitation:

the failure of the KCI transaction to be consummated;

the failure to maintain, increase, or replace revenues from the sale of our AlloDerm products;

the failure to comply with government regulations, including the FDA;

changes in the regulatory classification of our products;

our inability to obtain required premarket clearance or approval of our products for new intended uses;

limitations on the pricing of our allograft products;

potential for disease transmission by our products;

claims for damages by third parties, including product liability claims;

our dependence on a limited number of sources for human cadaveric tissue;

negative publicity about the use of donated human tissue in medical procedures;

changes in third-party reimbursement practices;

disruption to our operations;

the effects of competition;

our inability to protect our intellectual property;

reliance on independent sales and marketing agents and distributors to generate part of our revenues;

our inability to develop and commercialize new products; and

the other factors listed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2007 and other reports that we file with the Securities and Exchange Commission.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.

Supervision and Regulation — Securities and Exchange Commission

We maintain a website at www.lifecell.com. We make available free of charge on our website all electronic filings with the SEC (including proxy statements and reports on Forms 8-K, 10-K and 10-Q and any amendments to these reports) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We have also posted policies, codes and procedures that outline our corporate governance principles, including the charters of the board’s audit, compensation, nominating and corporate governance committees, and our Code of Ethics covering directors and all employees and the Code of Ethics for senior financial officers on our website. These materials also are available free of charge in print to stockholders who request them in writing. The information contained on our website does not constitute a part of this report.

In the following discussions, most percentages and dollar amounts have been rounded to aid the presentation. As a result, all such figures are approximations.

OVERVIEW

We develop, process and market biological soft tissue repair products made from allograft and xenograft tissue. Surgeons use our products to restore structure, function and physiology in a variety of reconstructive, orthopedic and urogynecologic surgical procedures. Our allograft products include: AlloDerm, for plastic reconstructive, general surgical, burn and periodontal procedures; GraftJacket, for orthopedic applications and lower extremity wounds; AlloCraftDBM, for bone grafting procedures; and Repliform, for urogynecologic surgical procedures. Strattice, a xenograft product, is intended for certain plastic reconstructive and general surgical procedures. Our research and development initiatives include programs designed to support the marketing of our products in current clinical applications, potentially extend their use into new surgical applications and to expand our product line in the rapidly growing biosurgery market.

Revenue and Expenses

Revenues . We market AlloDerm and Strattice for plastic reconstructive and general surgical applications through our direct sales organization. AlloDerm and Strattice are primarily sold to hospitals for use by general and plastic surgeons. Our products for orthopedic and urogynecologic procedures are marketed through independent sales agents and distributors. Our strategic sales and marketing partners include: Wright Medical Group, Inc. for GraftJacket and GraftJacket Xpress; Stryker Corporation for AlloCraftDBM; Boston Scientific for Repliform; and BioHorizons for periodontal applications of AlloDerm. In 2008, we expect our revenues to increase as we introduce Strattice and further penetrate the reconstructive market.

Cost of products sold . Cost of products sold consists primarily of fees paid to tissue recovery organizations, tissue procurement support costs, labor, overhead and supplies costs related to the processing of our tissue-based products. Cost of products sold also includes depreciation, freight handling and packaging costs. In 2008, we expect cost of products sold to increase slightly as a percentage of total revenue due to additional costs for procuring and processing larger allograft pieces of tissue and due to inefficiencies of producing Strattice in a pilot facility.

Research and development . Research and development, or R&D, expenses consist primarily of personnel costs within our research, product development and clinical functions, as well as the costs associated with pre-clinical and clinical studies and other product development related costs. We expense all R&D costs in the period incurred. R&D expenditures are expected to increase as a percentage of revenue in 2008.

General and administrative . General and administrative, or G&A, expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, information technology, human resources and regulatory affairs functions, as well as legal fees, accounting fees and insurance costs. In 2008, we expect G&A costs to increase as we add personnel to support our growth, however, we anticipate a slight decrease in G&A costs as a percentage of total revenue.

Selling and marketing . Selling and marketing expenses consist primarily of personnel costs within our sales, marketing and customer support functions, commissions paid to our sales representatives and costs associated with medical education, market research and promotional activities. In 2008, we expect sales and marketing expenses to increase due to the expansion of our sales force by 14 at the end of 2007, and higher marketing costs associated with the product launch of Strattice.

RESULTS OF OPERATIONS

The following table includes information from our Statements of Operations, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.

	Three Months Ended				Percentage of						% Increase
	March 31,				Total Revenue						(Decrease)
	2008		2007		2008			2007			2008 vs. 2007
Net Revenues:	(dollars in thousands)
Reconstructive revenues	$	49,435	$	37,658		91	%		88	%		31	%
Orthopedic revenues		3,375		2,960		6	%		7	%		14	%
Urogynecologic revenues		1,507		2,126		3	%		5	%		-29	%
Product Revenues		54,317		42,744		100	%		99	%		27	%
Research Grant Revenues		112		218		*			1	%		-49	%
Total Net Revenues		54,429		42,962		100	%		100	%		27	%

Costs and Expenses:
Cost of Products Sold		17,065		12,416		31	%		29	%		37	%
Research and Development		6,963		5,168		13	%		12	%		35	%
General and Administrative		6,392		4,828		12	%		11	%		32	%
Selling and Marketing		12,718		10,124		23	%		24	%		26	%
Total Costs and Expenses		43,138		32,536		79	%		76	%		33	%

Income from Operations		11,291		10,426		21	%		24	%		8	%

* less than 1%.

Three Months Ended March 31, 2008 and 2007

Revenues

Total revenues for the three months ended March 31, 2008 increased by $11.4 million, or 27%, to $54.4 million compared to $43.0 million for the same period in 2007. The increase was attributable to a 27% increase in product revenues to $54.3 million in the current period as compared to $42.7 million in the prior year.

Revenues generated from the use of our products in reconstructive surgical procedures increased by $11.8 million, or 31%, to $49.4 million in the three months ended March 31, 2008 compared to $37.7 million in the same period in 2007. The growth was primarily driven by increased demand for AlloDerm in complex hernia repair and breast reconstruction procedures. AlloDerm revenues increased 30% to $47.8 million in the three months ended March 31, 2008 compared to $36.8 million in the same period of 2007. Revenues from Strattice, which was launched in the first quarter of 2008, totaled $1.1 million.

Orthopedic product revenue grew by $415,000, or 14%, to $3.4 million in the three months ended March 31, 2008 from $3.0 million in 2007. This revenue growth resulted primarily from increased demand for our GraftJacket products. GraftJacket revenues were $2.9 million in 2008 compared to $2.5 million in the same period in 2007.

Revenues generated from the use of our Repliform product in urogynecologic surgical procedures decreased by $619,000, or 29%, to $1.5 million in the three months ended March 31, 2008 compared to $2.1 million for the same period in 2007.

Our independent sales and marketing agents and distributors generated 11% of our total product revenue in the three months ended March 31, 2008 compared to 14% in 2007. Wright Medical Group represented 5% of our total product revenues in the three months ended March 31, 2008 compared to 6% for the same period in 2007. No other individual independent sales agent or distributor generated more than 5% of our total product revenues in the three months ended March 31, 2008.

Research grant revenues were $112,000 in the first quarter of 2008 compared to $218,000 in 2007. As of March 31, 2008, approximately $738,000 of approved grant funding was available to fund future research and development expenses.

Costs and expenses

Cost of products sold for the three months ended March 31, 2008 was $17.1 million, or 31% of product revenues, compared to cost of products sold of $12.4 million, or 29% of product revenue for the same period in 2007. The increase in cost of products sold as a percentage of product revenue was the result of increases in costs associated with the procuring and processing of larger allograft tissue grafts and due to inefficiencies of producing Strattice in a pilot facility.

Total research and development expenses increased by $1.8 million, or 35%, to $7.0 million in the three months ended March 31, 2008 compared to $5.2 million for the same period in 2007. The increase was primarily attributable to higher: (i) operating supplies, (ii) payroll and related expenses associated with increased headcount and annual merit increases, and (iii) professional fees and expenses related to pre-clinical studies.

General and administrative expenses increased by $1.6 million, or 32%, to $6.4 million in the three months ended March 31, 2008 compared to $4.8 million for the same period in 2007. The increase was primarily attributable to higher: (i) professional fees, (ii) payroll and related expenses associated with increased headcount and annual merit increases, and (iii) employee recruitment expenses.

Selling and marketing expenses increased by $2.6 million, or 26%, to $12.7 million for the three months ended March 31, 2008 compared to $10.1 million for the same period in 2007. The increase was primarily attributable to: (i) higher selling expenses, principally payroll, commissions and travel and entertainment resulting from the expansion of our direct sales force and (ii) an increase in marketing and medical education program expenses for AlloDerm and Strattice. Selling and marketing expenses included agent fees of $689,000 and $1.0 million, respectively, in the three months ended March 31, 2008 and 2007.

Interest and other income, net

Interest and other income, net decreased by $72,000, or 7%, to $897,000 in the three months ended March 31, 2008 compared to $969,000 in the same period in 2007 due to a decrease in the interest rate earned on invested cash.

Income tax provision

The provision for income taxes increased by $457,000, or 9%, to $5.4 million in the three months ended March 31, 2008 compared to $5.0 million in the same period in 2007, reflecting an effective income tax rate of 44.5% and 43.6%, respectively. The increase in the effective tax rate was primarily due to the expiration of the credit for increasing research activities. Qualified research expenditures after December 31, 2007 are no longer eligible for tax credits. If Congress enacts legislation which retroactively reinstates the research tax credit, a tax benefit will be recognized at that time.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2008, we had $86.8 million in cash, cash equivalents and short-term marketable securities and $6.5 million in long-term marketable securities. Working capital increased to $138.8 million at March 31, 2008 from $128.3 million at December 31, 2007. The increase in working capital resulted primarily from increases in inventories, accounts receivable and a decrease in accrued liabilities, partially offset by a decrease in cash, cash equivalents and short term investments.

We used $1.4 million of cash for operating activities for the quarter ended March 31, 2008 compared to generating $6.4 million in cash in the same period in 2007. In the first quarter of 2008, the most significant uses of cash included an $7.6 million reduction in accounts payable and accrued liabilities and a $6.1 million increase in inventories to support future growth. The reduction in accounts payable and accrued liabilities were primarily the result of payments of payroll taxes, annual bonuses, and a non-product related settlement.

Capital expenditures were $2.9 million and $1.6 million, respectively, for the quarters ended March 31, 2008 and 2007. Capital expenditures in 2008 included $2.1 million of leasehold improvements for the expansion of our facility with the balance for the purchase of manufacturing and computer equipment.

Our financing activities used $302,000 for the quarter ended March 31, 2008 compared to $1.0 million generated for the same period in 2007. During the quarter ended March 31, 2008, certain employees elected to surrender vested shares to satisfy their tax withholding obligations. As a result, the Company funded $4.8 million in tax withholding payments and did not issue 110,000 shares of common stock.

The following table reflects a summary of our contractual cash obligations as of March 31, 2008:

	Payments Due by Period
(dollars in thousands)	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Operating leases	$	8,329	$	1,141	$	2,254	$	2,114	$	2,820
Licensing agreement		10,438		813		2,125		2,500		5,000
Total contractual cash obligations	$	18,767	$	1,954	$	4,379	$	4,614	$	7,820

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Although we have entered into contracts for services, the obligations under these contracts were not significant, and the contracts generally contain clauses allowing for cancellation without significant penalty.

We have also entered into employment agreements with certain executive officers that provide for potential payments and benefits upon employment termination. Such payments and benefits have not been included in the table above since potential payments are contingent upon uncertain future events.

At the end of 2005, we commenced a multi-year facility expansion at our Branchburg, New Jersey facility to increase office space, research labs and processing capacity. Capital expenditures associated with the ongoing facility project are estimated to be approximately $13.1 million in 2008. In addition, we estimate spending a total of $7.2 million for production, research and development, and computer equipment in 2008.

We believe that our current cash resources, together with anticipated product revenues and committed research and development grant funding, will be sufficient to finance our planned operations, research and development programs and capital expenditure requirements in the foreseeable future. However, we may need additional funds to meet our long-term strategic objectives, including the completion of potential acquisitions. We have no commitments for any future funding, and there can be no assurance that we will be able to obtain additional funding in the future through debt or equity financings, collaborative arrangements or other sources on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve significant restrictive covenants.

Critical Accounting Policies / Estimates

For the period ended March 31, 2008, there were no changes to our critical accounting policies as identified in our annual report of Form 10-K for the year ended December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk .

We are exposed to changes in interest rates primarily from our investments in certain marketable securities, consisting principally of fixed income debt securities. Although our investments are available for sale, we generally hold such investments to maturity. Our investments are stated at fair value, with net unrealized gains or losses on the securities recorded as accumulated other comprehensive income (loss) in shareholders’ equity. Net unrealized gains and losses were not material at March 31, 2008 or 2007.

Item 4. Controls and Procedures .

Disclosure controls and procedures.

During the first quarter of 2008, our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

Based on their evaluation as of March 31, 2008, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to reasonably ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in internal controls over financial reporting.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In September 2005, we recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), may not have followed the FDA’s requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. We promptly notified the FDA and all relevant hospitals and medical professionals. The FDA subsequently determined that patients who received tissue implants prepared from BTS donor tissue might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. We did not receive any donor tissue from BTS after September 2005.

We have been named, along with BTS and many other defendants, in lawsuits that relate to this matter. With the exception of the individual plaintiff cases discussed below, the suits purport to serve as class actions for persons receiving transplants who are not physically injured, but instead seek medical monitoring and/or damages for emotional distress. All of these cases are venued in New Jersey as part of a Multi-District Litigation (“MDL”). We have been successful in obtaining a voluntarily dismissal of every such class action, with the exception of one case that purports to only involve our products (“Watling”).

In addition, several suits, including a class action, have been filed in Federal Court in Rochester, New York and State Courts in New Jersey and Philadelphia Court of Common Pleas that seek compensatory damages from BTS and all processing defendants that received and used BTS-originated tissue, including us. Plaintiffs are the next-of-kin of the donors who did not authorize BTS to remove the tissue at issue. The Rochester cases which have been transferred to the MDL will be the subject of motions to dismiss. The other cases remain in the State Courts.

Finally, we have been named in three cases filed in the State Court of New Jersey, (“Turpyn”, Wirkler” and Guzman”) and one case in the MDL (“Robinson”) in which those plaintiffs allege to have contracted a disease from our product. Those cases are in the earliest stages of discovery and it is not presently confirmed that any plaintiff has been diagnosed with a disease nor is it known whether there is any causal relationship to our product.

We intend to vigorously defend each case. We will pursue dismissal of all cases which do not involve our product being at issue. We believe it is not currently possible to estimate the likelihood of an unfavorable outcome and/or the impact, if any, the ultimate resolution of these cases could have on our operations, financial position or cash flow. We maintain insurance coverage for events and in amounts that it deems appropriate. There can be no assurance that the level of insurance maintained will be sufficient to cover the claims or that the all of the claims will be covered by the terms of any insurance.

On April 14, 2008, a purported stockholders class action complaint, captioned Richard Bauer v. LifeCell Corporation et al., was filed by a stockholder of LifeCell in the Chancery Division of the Superior Court of New Jersey in Somerset County, naming LifeCell, its directors and KCI as defendants. The complaint alleges causes of action against the defendants for breach of fiduciary duties in connection with the proposed acquisition of LifeCell by KCI and seeks relief including, among other things, (i) preliminary and permanent injunctions prohibiting consummation of the Offer and the Merger and (ii) payment of the plaintiff's costs and expenses, including attorneys' and experts' fees. The lawsuit is in its preliminary stage. LifeCell and KCI believe that the lawsuit is without merit and intend to defend vigorously against the lawsuit.

Item 1a. Risk Factors

This Item 1A should be read in conjunction with “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Failure to complete the proposed Merger could negatively affect us . Consummation of the transactions contemplated by the Merger Agreement is subject to customary closing conditions, including (1) in the case of the Purchaser’s offer to purchase all of the issued and outstanding shares of Common Stock (the “ Shares ”), at least a majority of the Shares outstanding on a fully-diluted basis being validly tendered into the offer and not withdrawn; (2) in the case of the Merger, the approval of our stockholders if less than 90% of the Shares are acquired by Purchaser following the closing of the offer; (3) the expiration or termination of any waiting period (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (3) the absence of injunctions prohibiting the offer or the Merger; and (4) completion of Purchaser’s and KCI’s financing pursuant to the terms of an executed commitment letter among Purchaser, KCI and the lenders dated April 7, 2008. There can be no assurance that a majority of the Shares will tender pursuant to the offer or that our stockholders will approve the Merger Agreement (if required), or that the other conditions to the completion of the offer and the Merger will be satisfied. In connection with the Merger, we are subject to the following risks:

the current market price of the Company’s Common Stock may, to some degree, reflect a market assumption that the Merger will occur, and a failure to complete the Merger could result in a decline in the market price of such stock;

the occurrence of any event, change or other circumstances that could give rise to a termination of the Merger Agreement;

the outcome of any legal proceedings that may be instituted against us, members of our Board of Directors and others relating to the Merger, including any settlement of such proceedings that may be subject to court approval;

the inability to complete the Merger due to the failure to obtain stockholder approval (if required) or the failure to satisfy other conditions to the consummation of the Merger;

the failure of the Merger to close for any other reason;

our remedies against KCI and the Purchaser with respect to certain breaches of the Merger Agreement may not be adequate to cover our damages;

the proposed transactions disrupt current business plans and operations;

the proposed Merger may create difficulties in attracting employees;

the number of days during which the Merger transaction is pending may create difficulties in retaining key employees;

the effect of the announcement of the Merger on our business relationships, operating results and business generally; and

the costs, fees, expenses and charges we have and may incur related to the Merger.

Except for the additional risks described above, there have been no other material changes in the risk factors provided in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Item 5. Other Information

On April 7, 2008, Kinetic Concepts, Inc., a Texas corporation (“KCI”), and Leopard Acquisition Sub, Inc., a newly formed Delaware corporation and a wholly owned subsidiary of KCI (“Purchaser”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). On April 21, 2008, the Purchaser commenced a cash tender offer (the “Offer”) to purchase all of the issued and outstanding shares of common stock, par value $0.001 per share, of the Company at a price per share equal to $51.00. Following the consummation of the Offer, the Purchaser is expected to merge with and into the Company (the “Merger”), pursuant to which each outstanding share of Common Stock not purchased in the offer will be converted into the right to receive the offer price, except for those shares held by the Company, KCI or the Purchaser, and other than those shares with respect to which appraisal rights are properly exercised. After the Merger, the Company will continue to exist as a wholly owned subsidiary of KCI.

Item 6. Exhibits

2.1*

Agreement and Plan of Merger, dated as of April 7, 2008

31.1

Certification of our Chief Executive Officer, Paul G. Thomas, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of our Chief Financial Officer, Steven T. Sobieski, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of our Chief Executive Officer, Paul G. Thomas and Chief Financial Officer, Steven T. Sobieski, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K dated April 7, 2008.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LIFECELL CORPORATION


Date: April 24, 2008	By: /s/ Paul G. Thomas
	Paul G. Thomas
	Chairman of the Board,
	President and Chief Executive Officer
	(Principal Executive Officer)


Date: April 24, 2008	By: /s/ Steven T. Sobieski
	Steven T. Sobieski
	Vice President, Finance
	Chief Financial Officer and Secretary
	(Principal Financial Officer)


Date: April 24, 2008	By: /s/ Bradly C. Tyler
	Bradly C. Tyler
	Controller
	(Principal Accounting Officer)

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LIFC Lifecell Corp (MM)